Under Trump, the college debt crisis may get much worse

Under Trump, the college debt crisis may get much worse

The public face of Trump University — the defunct for-profit education company at the heart of two class-action fraud suits and one from the New York Attorney General — won the presidential election last Tuesday. And the for-profit college sector loves it.

Shares of companies affiliated with for-profit education like Bridgepoint Education, DeVry Education, and Navient Corporation shot up sharply after Donald Trump's election. Investors are betting a Trump administration would loosen an array of regulations that could boost profits for a sector accused of shady practices, including misrepresenting graduation and job placement rates, exploiting loopholes for federal funding, and worsening the student loan crisis.

BMO Capital Markets analyst Jeffrey Silber wrote in a note the morning after Election Day that within higher education "the private sector could be the big winner — or at least 'less of a loser' — under Republican-led White House, Congress, and Dept. of Education."

Trump has remained relatively quiet about specific higher education policies, aside from hinting during his campaign at dismantling the U.S. Department of Education and "expanding vocational and technical education" in a recently released plan for his first 100 days in office. Still, a Republican-controlled Congress — and a Republican president to sign its legislation — could roll back some regulations on for-profits.

At the heart of the upside for the sector is reauthorization of the Higher Education Act (HEA), a federal law that governs federal student aid and for-profits' access to it.

"A new Republican HEA will likely cement some protections and reforms that should make the for-profit sector more defensible against future, more hostile administrations and thus more investible," Credit Suisse research analysts Trace Urdan and Jeffrey Lee wrote in a note Friday morning.

Both Credit Suisse and BMO also noted the potential for eliminating gainful employment regulations, which make accessing federal funding tougher for for-profit schools if graduates don't meet certain standards. The rules were created during the Obama administration to define and enforce part of the HEA that essentially requires for-profits to provide students with an education that leads them to a job and a chance to pay off their debt.

"It's highly likely Congress will try to weaken or eliminate key regulations that protect students, like limits on the level of debt a career training program can have its student take on, relative to their debt," said Ben Miller, senior director of postsecondary education at the Center for American Progress. Miller is also a former senior policy advisor for the Education Department.

Another major provision that could see some slackening under a Trump presidency is known as defense to repayment. Under the law, students who attended a school that committed fraud may be eligible for a discharge of their federal loans. Borrowers from Corinthian Colleges and ITT Technical Institute, which both collapsed in the last two years after lawsuits and investigations into their practices, have used the defense. Among some of the worst allegations against a for-profit institution is that Corinthian Colleges recruited homeless students and signed them up for federal loans.

While defense to repayment will likely continue, Urdan and Lee foresee higher standards and lower payouts for the future. The lawsuits levied against Trump University could result in defense to repayment claims.

Aside from brightening investor sentiment, loosening federal regulations on the for-profit sector could exacerbate the student debt crisis. A 2015 paper from the Brookings Institution concluded that "nontraditional" students at for-profit and community colleges default at higher rates than other students, which disproportionately contributed to the recent spike in student debt. And the Institute for College Access and Success labels for-profit students the "least likely" group to pay down their federal student loan balance, regardless of whether or not they complete their programs.

The surge in shares of for-profit schools is one tiny aftershock in America's week-old political earthquake and reflects the likelihood of a hands-off regulatory approach toward what has, in recent years, been a scandal-prone sector. In 2005, seventy-four percent of institutional fraud cases being investigated over the previous six fiscal years involved for-profit entities, as then–Department of Education inspector general John P. Higgins testified before the House.

In 2012, a two-year investigation by the Senate Committee on Health, Education, Labor, and Pensions, widely known as the Harkin report, ripped the for-profit industry for failing to graduate students while saddling them with debt using federal money.

In response, the Obama administration imposed a regulations aimed at protecting students, like gainful employment and defense to repayment. The regulatory scrutiny helped send share prices within the industry down in recent years.

Now in the wake of Trump's election, for-profit education stocks have made up some of that lost ground. Since the close of trading on Nov. 7, the day before the election, shares of Bridgepoint Education, DeVry Education and student lender Navient rose 30.3 percent, 29.7 percent and 22.4 percent, respectively through the end of trading on Monday.